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Repeated Games
Road Map
1.
Forward Induction
Strong belief in rationality: At any history
of the game, each agent is assumed to be
rational if possible. (That is, if there are two
strategies s and s of a player i that are
consistent with a history of play, and if s is
strictly dominated but s is not, at this
history no player j believes that i plays s.)
Burning Money
0
B
3,1
S
.1,.1
S .1,.1
1,3
S -.9,.1
BB
BS
SB
SS
3,1
3,1
.1,.1
.1,.1
.1,.1
1,3
1,3
DB 2,1
-.9,.1
2,1
-.9,.1
DS -.9,.1
0,3
-.9,.1 0,3
O T
B
2,1
S
-.9,.1
0,3
0B
0S
.1,.1
Repeated Games
Entry deterrence
1
X
Enter
2 Acc.
(1,1)
Fight
(0,2)
(-1,-1)
Acc.
2 Enter
Fight
(-1,1)
(0,4)
Enter
2 Acc.
Fight
1
X
2 Acc.
Enter
Fight
(1,3)
(0,0)
Enter 2 Acc.
(2,2)
(0,0)
Fight
(-2,-2)
(-1,1)
C 5,5
0,6
D 6,0
1,1
Twice-repeated PD
1
D
2
C
1
C
10
10
1
D
2
1
D
D C
D C
5
11
6
6
0
12
5
11
D C
11
5
6
6
D
2
2
D
1
7
C
11
5
D C
6
6
12
0
7
1
6
6
1
7
2
2
7
1
A general result
G = stage game = a finite game
T = {0,1,,n}
At each t in T, G is played, and players remember
which actions taken before t;
Payoffs = Sum of payoffs in the stage game.
Call this game G(T).
Theorem: If G has a unique subgame-perfect
equilibrium s*, G(T) has a unique subgameperfect equilibrium, in which s* is played at each
stage.
M2
1,1
5,0
0,0
M1
0,5
4,4
0,0
0,0
0,0
3,3
Definitions
The Present Value of a given payoff stream =
(0,1,,t,) is
PV(;) = t=1 tt = 0 + 1 + + tt +
The Average Value of a given payoff stream is
(1)PV(;) = (1)t=1 tt
The Present Value of a given payoff stream at t is
PVt(;) = s=t s-t s = t + t+1 + + st+s +
Enter
2 Acc.
Fight
(-1,-1)
(1,1)
Strategy of Entrant:
Enter iff
Accomodated before.
Strategy of Incumbent:
Accommodate iff
accomodated before.
Incumbent:
V(Acc.) = VA =
V(Fight) = VF =
Case 1: Accommodated before.
Entrant:
Accommodated
Enter =>
X =>
Not Acc.
Fight =>
Acc. =>
Enter =>
X =>
Infinitely-repeated PD
C
C 5,5
0,6
D 6,0
1,1
A Grimm Strategy:
Defect iff someone
defected before.
VD = 1/(1);
VC = 5/(1) = 5VD;
Defected before (easy)
Not defected
D =>
C =>
C
Folk Theorem
Definition: A payoff vector v = (v1,v2,,vn) is feasible
iff v is a convex combination of some pure-strategy
payoff-vectors, i.e.,
v = p1u(a1) + p2u(a2) ++ pku(ak),
where p1 + p2 ++ pk = 1, and u(aj) is the payoff
vector at strategy profile aj of the stage game.
Theorem: Let x = (x1,x2,,xn) be s feasible payoff
vector, and e = (e1,e2,,en) be a payoff vector at
some equilibrium of the stage game such that xi > ei
for each i. Then, there exist < 1 and a strategy
profile s such that s yields x as the expected
average-payoff vector and is a SPE whenever > .
Folk Theorem in PD
C
C 5,5
0,6
D 6,0
1,1
A SPE with PV
(1.1,1.1)?
With PV (1.1,5)?
With PV (6,0)?
With PV (5.9,0.1)?
Infinitely-repeated
Cournot oligopoly
N firms, MC = 0; P = max{1-Q,0};
Strategy: Each is to produce q = 1/(2n); if any
firm defects produce q = 1/(1+n) forever.
VC =
VD =
V(D|C) =
Equilibrium
10
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5
20
40
60
80
200
400
600
800
100
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5
1000
11
IRCD (n=2)
Strategy: Each firm is to produce q*; if any one
deviates, each produce 1/(n+1) thereafter.
VC = q*(1-2q*)/(1-);
VD = 1/(9(1-));
2
VD|C = max q(1-q*-q) +VD = (1 q *) / 4 +
9(1 )
Equilibrium iff
2
q * (1 2q *) (1 )(1 q *) / 4 + / 9
q*
9 5
3(9 )
x = , y = (3-5/3 )/(9- )
0.4
0.3
0.2
0.1
0
0
0.2
0.4
0.6
0.8
12
13